02.23.13

Yesterday, two interesting pieces of news emerged relating to LightSquared’s proposal that it should be granted “shared” access to the 1675-80MHz band in exchange for giving up “rights” to operate a terrestrial network in the 1545-55MHz spectrum block, which is closest to GPS and caused the biggest concerns during the 2011 testing.

The first of these was the GAO report on options to improve receiver performance mandated in the JOBS bill last February in response to the LightSquared debacle. Both this report and an associated paper by the FCC’s Technical Advisory Committee (TAC) published earlier this month suggest that the FCC should do more to explore setting “harm claim” thresholds at which receiver manufacturers could assert that a new service was causing interference. Spectrum bands in which these thresholds could be trialled are identified, but unfortunately for LightSquared, no mention is made of the L-band/GPS band boundary (and the rationale given for selecting a trial band appears to suggest that the LightSquareed spectrum would not be a good candidate for initial experimentation).

Instead, one of the leading candidates is Globalstar’s proposed S-band TLPS service, which perhaps explains Globalstar’s confidence that the FCC will soon move forward with an NPRM, despite the opposition Globalstar faced from the WiFi community, Clearwire and others in response to the TLPS proposal. On the other hand, the fact that such a proceeding would be an experiment to try and determine an appropriate interference threshold may well mean it would still be very difficult for Globalstar to undertake any large scale deployment in the near term or receive approval by the end of 2013 as Globalstar hoped.

The second, and more significant, development was an ex partefiling by LightSquared which documented a meeting on Wed Feb 20 between LightSquared’s regulatory lawyers and the FCC’s General Counsel and the Acting Chief of the FCC’s Office of Strategic Planning. Curiously, this meeting didn’t involve any technical personnel, despite the fact that the “much of the discussion” focused on “the proposed shared use of 1675-1680 MHz spectrum”. That seems to imply that the FCC was focused on the political problem associated with any perceived spectrum “giveaway” and appears to be confirmed by LightSquared’s offer that it would undertake “relocation of NOAA’s radiosondes…in a manner consistent with the Commission’s emerging technology and other applicable precedents”. In other words LightSquared offered to pay for this relocation.

Even that may prove insufficient, given that LightSquared’s proposed “sharing” with NOAA (based on exclusion zones around certain satellite receiving stations, after relocation of the radiosondes) actually involves even less sharing than will be needed in the 1695-1710MHz band, which has now been confirmed by NTIA as being suitable for auction. In the 1695-1710MHz band there will be protection zones around 18 satellite downlink sites, significantly more than the four locations (Fairbanks, AK, Wallops Island, VA, Suitland, MD, and Greenbelt, MD) that LightSquared would have to protect in the 1675-80MHz band.

As a result, it seems that the development of rules for interference limits at the L-band/GPS boundary is unlikely to be a high priority in the immediate future, and there are still major roadblocks to any spectrum “swap” involving the 1675-80MHz band. We will apparently soon see how much LightSquared is offering to pay for relocation of NOAA’s radiosondes, but if this spectrum is deemed just as suitable for auction as the 1695-1710MHz band, then that may be far from sufficient.

LightSquared now has a deadline of May 31 to come up with a plan to emerge from bankruptcy and after July 15 it will lose its exclusivity to propose a plan. However, if the FCC continues along the lines indicated yesterday, the main asset of the estate may end up being its legal claims, whether against Harbinger or the FCC.

02.22.13

The question on everyone’s mind after DISH’s results call on Wednesday is of course “when will Charlie Ergen find a partner” to fulfill his wireless ambitions. Ergen was pretty clear that if DISH’s offer to buy spectrum from Clearwire succeeds then Sprint would be backed so far into a corner that it would be forced to partner with DISH (on Ergen’s terms). Conversely, if Sprint won its takeover bid for Clearwire then there is no way that DISH would accept Sprint’s terms for a partnership. The difference between DISH and Sprint’s positions appears to be that Sprint wants a LightSquared-like deal: a large cash payment for the network buildout, and Sprint having the option (but not the obligation) to buy capacity, whereas DISH wants Sprint to take its payment for a network sharing agreement solely in capacity, not in cash.

As an aside, its interesting to note that the relationship between Ergen and Hesse is obviously pretty poor: Sprint’s proxy for the Softbank deal notes that it was Keith Cowan who dealt with Ergen (Company Z) last summer, not Hesse. As a result, if Sprint did lose Clearwire’s spectrum to DISH, I wouldn’t be at all suprised to see the blame placed on Hesse, resulting in him leaving Sprint, and Masayoshi Son and Charlie Ergen could then work out a partnership between themselves.

If DISH’s bid for Clearwire fails, then DISH will at least have made an impressive profit on the deal: according to DISH’s 10-K, its holdings of Clearwire debt are now worth $951M, compared to an adjusted cost as of September 2012 of $745M. That is a profit of over $200M excluding the interest payment made in December 2012, which would have been at least another $50M (assuming the June interest payment is already included in the adjusted cost basis).

However, and more importantly, what is Ergen’s backup plan, if he simply takes his profits in Clearwire? If DISH wants to achieve a partnership this year, then the only realistic offer is to mount a counterbid for MetroPCS. Recall that DISH offered $11 per share for MetroPCS last summer (in parallel with DISH’s bid to buy spectrum from Clearwire) which was rejected as undervaluing the company. Given MetroPCS is now trading at only $10 per share, what does DISH have to lose by making a similar offer? At the very least that would force T-Mobile to the bargaining table, and DISH might be persuaded to withdraw its offer if T-Mobile offered an attractive network sharing deal. Indeed, if Clearwire’s special committee makes a decision next week to draw on the Sprint funding, I would expect DISH to potentially move on MetroPCS immediately thereafter.

If DISH doesn’t succeed with that gambit, then the timeline for a deal moves back at least until the end of this year or sometime next. LightSquared’s exclusivity in its bankruptcy case has been extended to July 15, but alternative offers can be made after that time, with a view to a resolution of the case before the end of this year. As I’ve noted before, if DISH takes a slightly longer time horizon, then a bid for LightSquared, and conversion of the 2GHz spectrum to downlink use would be an obvious value-enhancing maneuver. In addition, it would put DISH in a much better position to challenge Sprint in the auction for the H-block spectrum, which Sprint has admitted it needs to buy.

Finally, DISH’s ultimate fallback option may be to try and sell the spectrum to another company. However, AT&T appears well set for the next several years, having apparently decided not to pursue DISH when Ergen’s waiver request was denied by the FCC last spring. Verizon has also ruled itself out as a buyer and T-Mobile will be tied up integrating MetroPCS for some time (and after that acquisition will own more spectrum per subscriber than either AT&T or Verizon).

As a result, the timeline for that sale (at least if Ergen is to get an attractive price) may be pretty long, probably beyond the resolution of the broadcast incentive auction (scheduled for 2014) and perhaps even extending until after the 2016 Presidential election, if AT&T and Verizon are to be regarded as serious bidders, given the desire of the FCC to let Sprint and T-Mobile catch-up with their bigger rivals. That is even more likely to be the case if the recent slowdown in the growth of wireless data traffic prompts a reassessment of operators’ future spectrum needs and finally buries the supposed “spectrum crunch”.

02.21.13

As Inmarsat approaches its end of year results presentation, scheduled for March 7, the company’s stock price has been surging in the expectation of continued strong progress in the maritime market, which is likely to lead to full year wholesale MSS revenue growth for 2012 (excluding LightSquared payments) somewhat above Inmarsat’s 0%-2% target. This has been driven primarily by Inmarsat’s 2012 price rises, which have been so successful that Inmarsat announced further price rises of around 10% for E&E services last month.

I estimate that these new price rises could boost wholesale maritime revenues by a further $10M (roughly 3%) in 2013, on top of the pull-through from the mid year price rises in 2012, and as a result, it is plausible to imagine that Inmarsat’s wholesale MSS maritime revenues might rise by as much as 10% in 2013. Thus, unless there are severe cutbacks in government usage this year, overall revenue growth for 2013 may again come in quite a bit above the 0%-2% target. Our updated profile of Inmarsat provides full details of our forecasts by product, and will be released shortly.

That revenue upside perhaps explains why Inmarsat has become notably more aggressive in recent weeks, for example telling its sales team that commission will no longer be paid for selling Iridium products and services (historically Stratos has sold over $10M of Iridium equipment each year). In addition, the IS-27 launch failure appears to have given Inmarsat more confidence that potential partners will need GX for maritime and aeronautical services, rather than continuing to rely on Ku-band services in what may now become a capacity-constrained North Atlantic Ocean Region over the next couple of years.

One intriguing issue to watch in terms of Inmarsat’s relationships with its distributors is the ongoing dispute in Russia, where I’m told Morsviazsputnik has refused to pay for Inmarsat capacity for a substantial period of time (note that Inmarsat’s trade receivables have been increasing by about $10M per quarter during 2012, excluding LightSquared payments), unless all Inmarsat-equipped vessels going into Russian waters use a Russian SIM. This dispute has apparently extended to the Russians modifying their call routing gateway (which sends all traffic within 200 miles of Russian territory to an intercept point in Russia) to give them the ability to cut off the communications on foreign vessels. I’m told that in response Inmarsat has considered terminating the routing of traffic to the Russian intercept point, which would of course escalate the dispute even further and make it even more difficult to recover the withheld revenues.

Beyond this year, Inmarsat is guiding that its 8%-12% revenue growth in 2014-16 will be backend loaded, and so growth in 2014 will not need to increase sharply (which would be difficult prior to achieving global GX coverage). Indeed, a combination of continued price rises on L-band services and a release of some of the cash previously received from LightSquared (and never spent on installing filters) could help to meet expectations in the next few years, even if GX does not live up to Inmarsat’s projected $500M in wholesale revenue by 2019.

With respect to GX, I have been cautious about the $500M target because I have always assumed that maritime would account for the largest share of the GX business and it is very hard to see how Inmarsat could hope to generate $200M-$300M of wholesale maritime GX revenues by 2019, when Inmarsat itself estimates that only $145M was spent on maritime FSS space segment capacity in 2010.

However, I understand that Inmarsat is now suggesting that the GX government business will generate more revenue than the maritime market. Of course that is much harder to prove or disprove, especially as Inmarsat gave very little insight in the October 2012 investor day into whether the government business is expected to rely mainly on the dedicated HCO beams in military Ka-band frequencies or on the standard wide area coverage beams which only use civil Ka-band frequencies.

An additional GX question that may soon be answered is the potential for a fourth backup satellite to be ordered. Inmarsat certainly has ample justification for placing a near term order, given its reliance on Proton launchers for all three GX satellites, and the run of problems that Russian rockets have had in recent months. Although Inmarsat would presumably portray an order as a sign of increased confidence in the market for GX, this would also add up to $200M of additional capex to the $1.2B GX program, even if no commitment was made to a fourth satellite launch at this stage.

Given Inmarsat’s more assertive stance in the market, it will now be particularly interesting to see whether Inmarsat can persuade distributors to share its positive view of the overall GX opportunity, and make revenue commitments similar to the $500M that Intelsat has achieved from Caprock, MTN and Panasonic for its EPIC system. Time will tell, but at least so far, my assertion last October that we had reached a turning point in MSS history has come only partly true: while it certainly appears that the next few years will bring regular price rises, an improvement in Inmarsat’s relationships with its distributors still seems like a distant prospect.

02.07.13

After discovering the retrospective revisions made to 2011 data traffic in Cisco’s Feb 2013 mobile VNI forecast yesterday, I wondered if this was something new, or if it was simply that no-one had ever noticed this issue before. Because some of the 2012 mobile VNI data is still accessible through the fixed VNI tool, it’s possible to do the same set of calculations for last year’s mobile VNI, and conclude that Cisco did in fact retrospectively change the 2010 data in Feb 2012 (on a global basis making an 8% increase for 2010 compared to the 13% decrease for 2011 seen in this week’s figures), as shown below:

The revisions to 2011 have the effect of enhancing Cisco’s announced data growth number for 2012 (now stated to be 70% on a global basis), because the estimated Dec 2012 traffic is only 48% higher than the 597PB/month for Dec 2011 traffic that Cisco estimated last year, and less than half the expected growth of 110% that Cisco forecast last year for 2012. Of course no-one is stepping up to admit that in fact Cisco’s new figures imply global traffic growth in 2011 was only 103%, rather than the 133% growth that was trumpeted originally as exceeding their own projections (and ironically this year’s press release doesn’t even mention that data growth was 70% in 2012).

It’s even more revealing to compare some of Cisco’s numbers to CTIA’s October 2012 statistics on mobile data traffic in the US. After all, even though CTIA has a blinkered focus on pushing the “spectrum crisis” (seen once again today in an op-ed quoting a statistic invented apparently out of thin air, that “Cisco forecasts mobile data traffic in the United States will be 20 times greater in 2015 than it is today”), at least their statistics are based on direct reporting by carriers accounting for 97% of wireless connections in the US, and so in this realm they ought to be king.

Given that wireless operators have no interest whatsoever in understating their traffic, its hard to see how US mobile data traffic could be higher than the CTIA statistics, yet that is precisely what Cisco’s estimates imply. Indeed Cisco have revised their Dec 2011 traffic estimate for the US upwards, to 127PB/mo, compared to the 108PB/mo estimate given in last year’s VNI forecast. However, CTIA’s statistics indicate that US mobile data traffic in the first 6 months of 2012 was 633PB, or an average of 105.5PB per month, and so if Cisco were accurate, then monthly data traffic would have had to decline between Dec 2011 and Jun 2012. Similarly, if Cisco’s Dec 2012 estimate of 207PB/mo of mobile data traffic in the US was accurate, then monthly traffic would have had to roughly double since Jun 2012, again an inconceivable shift (especially if traffic had supposedly fallen between Dec 2011 and Jun 2012).

Overall, based on CTIA’s statistics, I estimate that US mobile data traffic was roughly 96PB/mo in Dec 2011, and assuming consistent growth in the second half of 2012, the total for Dec 2012 should be around 134PB/mo, which is equal to a 40% traffic growth rate for monthly traffic during 2012. Of course that’s much lower than the 59% growth in total traffic between all of 2011 and all of 2012 that is implied by my extrapolation of the 2012H1 data, because the much smaller amount of traffic in the first half of 2011 pulls down the 2011 total. However, the 40% growth is the relevant figure to be used for comparison with Cisco’s numbers, and would have massive implications for the five year outlook: even a continuation of this 40% growth rate would represent only five-fold growth in monthly US mobile data traffic between Dec 2012 and Dec 2017, not the ten-fold growth that Cisco projects. The absolute gap would be even greater: roughly 720PB/mo in Dec 2017 vs 1963PB/mo forecast by Cisco.

02.06.13

Last year when Cisco released the 2012 mobile VNI forecast, I noted that they had been building castles in the air, and needed to put foundations under them. In particular I was concerned about substantial changes in the assumed share of offloaded traffic, which had changed dramatically between the 2011 and 2012 reports. Specifically, in 2011 Cisco had estimated that in 2010 21% of US smartphone and tablet traffic was offloaded (from mobile-connected devices, i.e. apparently excluding WiFi-only tablets) and that would increase to 30% by 2015. In 2012 they estimated that 49% of this traffic was offloaded in 2011 and that would decrease to 46% in 2016. Now in the latest report (actually in the VNI tool stats, not the report itself), Cisco estimate that:

47% of the United States’s mobile data traffic was offloaded in 2012.
66% of the United States’s mobile data traffic will be offloaded in 2017.
The amount of traffic offloaded from smartphones will be 64% in 2017, compared to 59% at the end of 2012.
The amount of traffic offloaded from tablets will be 78% in 2017, compared to 77% at the end of 2012.

So yet again we’ve had a dramatic change in assumptions about offloading, without much explanation or any retrospective view of whether the prior estimates were remotely accurate. Indeed, if the true amount of offload traffic (from smartphones and tablets combined) has increased from 21% at the end of 2010 to 49% at the end of 2011 to something over 60% at the end of 2012, it is far from clear that the share of offloaded traffic on these devices will hardly grow at all (1% p.a.) in the next five years. (Note that the large projected growth in overall offloaded traffic is an artifact of the change in mix, with total traffic becoming dominated by smartphones and tablets, so laptops play a much less important role).

In reality, users of Cisco’s own Data Meter Application already offload more than 80% of their traffic and may be rather more representative of the longer term smartphone market, at least in North America. One consequence of Cisco’s assumption that offload growth will slow, is that data traffic growth is projected to accelerate once again in 2013 compared to 2012 (e.g. North American traffic growth is projected to be 70% in 2013 compared to 64% estimated in 2012, and on a global basis growth of 78% is projected in 2013 compared to 70% estimated in 2012), which seems rather unlikely.

Even more perplexing are some of the individual changes in estimates between 2011 and 2012, which appear to relate to totally undocumented retrospective revisions to the 2011 data (which can be extracted by use of the VNI tool).

In North America, Cisco estimated last year that traffic would grow from 118,972 TB/mo in Dec 2011 to 259,253 TB/mo in Dec 2012 (a growth rate of 118%). Now Cisco estimates that traffic in North America was only 222,378 TB/mo in Dec 2012, with growth of 64% (per the VNI tool), so in other words, Cisco’s estimated 2011 traffic was ~136,000 TB/mo (14% more than the original estimated).

Incidentally, traffic in the US was estimated to have grown by only 62% (almost exactly as I predicted from the CTIA data last October) to 206,854 TB/mo in Dec 2012. However, in absolute terms Cisco’s number for the US appears far too high: extrapolating CTIA’s 6 month statistics (based on real data from almost all US mobile operators) indicates there should be no more than 150,000 TB/mo of mobile data traffic in the US by Dec 2012.

Similarly, the Cisco numbers for Western Europe indicate growth of 44% between Dec 2011 and Dec 2012 (to 181,397 TB/mo), compared to an original projection of 103% growth, but the 2011 estimate has been retrospectively revised to about 126,000 TB/mo, or 31% lower than the 180,370 TB/mo originally given in the 2011 report.

In addition, the previous assessment that significant traffic would be generated by “home gateways” has been completely erased and significant changes have been made to all of the regional traffic totals for 2011, as given in the table below.

UPDATE: Apparently a later version of the February 2012 Mobile VNI forecast (not that linked below) corrected a typo in the Middle East & Africa regional total, so that the discrepancy between the sum of the regional traffic and the global total traffic (597,264 TB/mo) was eliminated. The chart above has been updated to incorporate this modification.

Thus, though Cisco tries to direct our attention to future growth potential (not least by deleting access to previous reports – for your benefit, here are copies of the reports published in February 2010, 2011, 2012 and 2013 respectively), I’m hugely concerned about whether the traffic data that is supposed to be covering historic periods is at all reliable, given the enormous scale of unstated retrospective revisions to these numbers, and the lack of correlation with much more detailed studies such as that by CTIA. If the current data isn’t accurate, then its hard to see how much reliance can be placed on Cisco’s forecasts for future periods.

Nevertheless, Cisco appears to have bowed at least partially to reality, acknowledging that 2012 growth was “slower than expected in some regions” and side-stepping its prior claims of a “data deluge“. I wonder if those, including the FCC Chairman, who have made so much fuss about the “spectrum crisis”, and have repeatedly cited Cisco’s over-optimistic projections to justify their argument, will now do likewise. Perhaps they might even give less credence to these numbers, especially given the apparent inaccuracies in Cisco’s estimates.

02.04.13

The proxy statement filed by Clearwire on Friday morning made for interesting reading, not least in guessing the identity of some of the companies that Clearwire has talked to over the last couple of years. Some are obvious (A=T-Mobile, B=AT&T, C=MetroPCS, D=China Mobile, F=LightSquared, H=Verizon) and some are more speculative (E=Google? G=one of the hedge funds invested in Clearwire, I=Samsung or Qualcomm?), but what stands out is the lack of bids for Clearwire’s spectrum at an attractive price.

In particular, Clearwire didn’t find the bid from T-Mobile (in fall 2010) to be “compelling” and was unable to reach agreement with MetroPCS (in fall 2011) on the spectrum to be included in any deal (i.e. owned vs leased) or the price. Clearwire notes that even DISH’s bid at a price of $0.19/MHzPOP “related to the acquisition of higher quality spectrum assets of Clearwire and would leave Clearwire with less valuable spectrum assets”, implying that it is mostly for owned and/or contiguous spectrum (as I suspected), and implying that the price for the spectrum that Clearwire would be left with could be rather lower.

However, the fundamental reason for Clearwire to acquiesce to the Sprint bid appears to be that Clearwire has been unable to find a second wholesale customer for its network. That target customer appears to have been AT&T, given the financials for the MCC (Multi-Customer Case) set out in the proxy, which assumed that the second customer would generate approximately 1.5 times the revenue produced by Sprint, or in other words would have had around 90 million customers who could use the Clearwire network.

AT&T certainly took quite a lot of interest in Clearwire, conducting “extensive due diligence” in fall 2010 (though ultimately declining to submit an offer, presumably opting instead to pursue the T-Mobile merger) and then resuming discussions (at AT&T’s initiative) in February 2012:

In February 2012, Party B approached the Company about restarting discussions about a possible spectrum sale and commercial agreement. The conversations between the parties focused on technical issues and the spectrum that the Company could potentially make available for sale. Party B made it clear during the discussions that a transaction with the Company was one of the several options it was pursuing in order to satisfy its spectrum needs. Party B terminated further discussions with the Company in May 2012 after it had determined to pursue one of the other options to satisfy its spectrum needs.

AT&T’s deep dive into “several options” in the first half of 2012 (after rejection of the T-Mobile bid) appears to have been very extensive, and focused largely on options to meet longer term spectrum needs (3+ years out). Of course we know that AT&T ultimately decided to buy NextWave, after approaching NextWave initially at the beginning of April. However, I’m told that AT&T also approached LightSquared in early 2012 with a view to buying the 1670-75MHz spectrum block (when LightSquared indicated it was considering a sale of these spectrum leases), and its inconceivable that AT&T didn’t also discuss with DISH the possibility of buying the 2GHz MSS spectrum (when it actively tried to interfere in DISH’s FCC proceeding).

Was AT&T scared off by the FCC’s denial of DISH’s ATC waiver request in early March, or simply by Charlie Ergen’s high asking price. More than likely it was the latter, given AT&T’s initial low ball $350M offer for NextWave’s spectrum in April 2012 (after the waiver denial, but presumably when discussions with DISH were still ongoing), followed by a decision to offer rather more in early June, after AT&T had reached a decision on its preferred spectrum option. Around the same time DISH also began exploring options with Clearwire and MetroPCS, leading up to its parallel bids to take over MetroPCS and buy spectrum from Clearwire in August 2012.

I’ve often thought that AT&T’s interest in WCS could be independent of a possible purchase of DISH’s spectrum, with WCS providing a “high band” option for dense urban networks (as a direct alternative to Clearwire’s BRS/EBS spectrum), while DISH’s spectrum provides a “mid-band” alternative to PCS or AWS. Indeed, after AT&T gave up a large slice of its AWS spectrum to T-Mobile as part of the break fee, it was plausible to think AT&T would have a potential shortfall in its mid-band spectrum assets, which would make DISH’s spectrum particularly attractive. However, it appears that AT&T may instead have looked at DISH’s spectrum more as “what do we need for 3+ years out”, considering it alongside WCS and BRS/EBS, which would almost certainly lead to a mismatch of valuation expectations with Charlie Ergen.

Instead AT&T now appears to be focused on a combination of its 700MHz LTE network (bulking up with the B block purchase from Verizon) plus smaller amounts of cellular, PCS and AWS spectrum (including the acquisition from ATNI/Alltel and the AWS spectrum included in the NextWave purchase) to meet its near term needs. The 12MHz of Qualcomm 700MHz D/E block spectrum would then be used for supplementary downlink to relatively narrow 5x5MHz cellular, AWS or PCS LTE deployments in urban areas from 2014 (though DISH’s 700MHz E block holdings could spoil any prospects of deployment outside the 5 major metropolitan areas where AT&T owns the entire band). This would explain why AT&T has retained 10MHz of AWS spectrum in Los Angeles, splitting the AWS A block spectrum with Verizon as part of the 700MHz B block deal.

So where does that leave Charlie Ergen? Perhaps he really does need to secure a deal with Clearwire not just to make it impossible for Sprint to get control of Clearwire’s spectrum, but also so DISH has a way forward to a near term deployment? Alternatively, moving towards a deal with LightSquared and a reorganization of the AWS-4 band to create additional downlink spectrum (as I suggested in December) could continue to create problems for Sprint (given its desire to purchase the H block) without committing DISH to a near term buildout. Either way, it seems that in the near term, Ergen might be more likely to be a buyer than a seller of spectrum.